Weekly Report - Sterling feeling the resistance after a mid-week boost, ECB lays out a clearer plan in the monthly bulletin, dollar takes a beating.

UK – Although the pound is performing very well this last week, there does seem to be resistance from other currencies against the pound, which is limiting its gains. Manufacturing Data on Tuesday gave Sterling a boost, but the question is how long can it stay in the spotlight with limited data in the next week to support it? UK data throughout the week will start off with CPI y/y figures on Tuesday, followed by the Claimant Count Change and Unemployment rate on Wednesday. The house view is that Cable will most-likely retreat from its relatively high levels, as the dollar continues to slowly but surely gain strength as the Federal Reserve winds down the QE programme.

Eurozone – The ECB monthly bulletin made it clear that there was not a change in the Minimum Bid Rate at the beginning of this month because “the moderate recovery of the euro area economy is proceeding in line with the Governing Council’s previous assessment”. However, the bulletin reiterated Draghi’s points from his press conference earlier this month that the ECB stands prepared to act swiftly with monetary accommodation and lower interest rates if required. This has helped to strengthen the Euro at the end of the week. In the next week, the only major event directly affecting the Euro will be German ZEW Economic Sentiment on Tuesday. The Euro ended the week on a high note, as the monthly bulletin last Thursday, combined with positive sentiment toward the Eurozone as the result of a highly-successful Greek bond sale, allowed it to gain strength near the end of the week. However, President Draghi blamed the strength of the Euro for the low rate of inflation in the Eurozone over the weekend, and made the statement that the “further strengthening of the Euro requires further monetary stimulus”, signalling that unconventional monetary policy may not be far away.

USA – FOMC meeting minutes which were released on Wednesday evening of this last week confirmed that there was discussion about the central bank’s collective concern over the low rate of inflation. The concern was not enough to warrant a clearer timeline of when we can expect the next interest rate rise, but the market has interpreted it as a sign that interest rates will stay low for longer, undermining the USD at week’s end. During this next week before the Easter holiday, the data to watch for which will affect the dollar will be Core Retail Sales m/m and Retail Sales m/m on Monday, Core CPI m/m and Janet Yellen speaking at a Federal Reserve conference in Atlanta on Tuesday, Building Permits data and Janet Yellen speaking again at the Economic Club of New York on Wednesday, and finally, Unemployment Claims and the Philly Fed Manufacturing Index data on Thursday. Cable does seem to be at the top of the range, and barring any big surprises in the market, we should see the dollar able to pare back some of the losses it sustained last week against other currency majors.

End of week forecast:

GBP / EUR	1.2100
GBP / USD	1.6650
EUR / USD	1.3750
GBP / AUD	1.7750

Nicholas Ebisch

Corporate Account Manager

Caxton FX

Eurozone growth data comes back to haunt the euro

Data this morning has confirmed that the eurozone remains very much in recession. We knew that this was the case, but we didn’t know quite conditions were quite this bad. In the final three months of 2012, the French economy contracted by 0.3%, Germany’s by 0.6% and Italy’s by 0.9%, with all three GDP figures coming in worse than market expectations. The euro weakened on all of these data releases. Perhaps surprisingly, given that the market had the above figures already out in the open, the euro also weakened as a result of the overall eurozone GDP figure, which revealed a 0.6% contraction. Meanwhile, Portugal also posted a 1.8% contraction, while the Netherlands shrank by 0.2%. Spain we know contracted by 0.7%. Suddenly the UK’s Q4 GDP figure of -0.3% doesn't seem quite so disastrous. 

The market has been content to ignore weak eurozone data in recent months and as a result the euro has had an easy ride. Super Mario (Draghi) said he would do whatever it takes to keep the euro afloat, Greece managed to kick the can further down the road, and bond yields have been brought under control. All is well? All is not well - these eurozone figures are a reality check and really bring home what the market has seemingly been willing to sweep under the carpet. 

Perhaps the market is not ignoring it and perhaps they are looking beyond at a recovery in 2014, basking in the relief that the debt crisis no longer threatens the very existence of the euro. Either way, if data like today's continues to filter through in 2013 without significant improvement, then the ECB will be forced to act by cutting interest rates and you can be sure that the market will sit up and take notice when that happens. Germany has posted some encouraging figures so far in 2013 but it is anything but plain sailing for the euro from here.

The strong eurozone exchange rate over the past few months will surely have contributed to these awful eurozone GDP figures. The ECB remains reluctant to intervene to weaken the euro but they will have limits to what sorts of levels they are willing to tolerate. This is a key factor behind EUR/USD’s stalling ahead of $1.40. Next up, the Italian elections - expect the nerves to continue jangling over the next week or so. 

Richard Driver

Currency Analyst

Caxton FX